22. Derivative financial instruments

22.1 Accounting policy

The Group uses derivative financial instruments ("derivatives") in the form of forward foreign currency contracts, forward commodity contracts and interest rate swaps to manage the effects of its exposure to foreign exchange risk, commodity price risk and interest rate risk. The way in which derivatives are used to manage the Group's financial risk is detailed in note 30.

Derivatives are measured at fair value. The fair value of forward foreign currency contracts and forward commodity contracts is calculated using market prices at the balance sheet date. The fair value of an interest rate swap is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the creditworthiness of the swap counterparty.

The method of recognising the gain or loss on remeasurement to fair value depends on whether the derivative is designated as a hedging instrument for hedge accounting purposes and, if so, the nature of the item being hedged. Strict conditions have to be satisfied in order to qualify for hedge accounting, including a determination both at inception of the hedge and on an ongoing basis that the hedge is expected to be highly effective in achieving offsetting changes in fair values or cash flows attributable to the hedged risk. The change in fair value of a derivative that is not designated as a hedging instrument for hedge accounting purposes is recognised within trading profit in the Group income statement. Wherever possible, the Group avoids the administrative burden of hedge accounting, and does not designate a derivative as a hedge when, in the absence of hedge accounting, the change in fair value of the hedged item is itself recognised within trading profit in the Group income statement in the same period as the change in fair value of the derivative. No derivatives are held for speculative purposes.

Cash flow hedges

The effective part of any gain or loss on a derivative that is designated as a cash flow hedge is recognised in other comprehensive income and presented in the hedging reserve in equity. The ineffective part of any gain or loss is recognised immediately within trading profit, or within finance costs in the case of interest rate swaps designated as cash flow hedges. When the transaction that was being hedged is realised and affects profit or loss, the cumulative gain or loss on the derivative is removed from the hedging reserve and recognised in the income statement in the same period.

Fair value hedges

The change in fair value of a derivative that is designated as a fair value hedge is recognised within trading profit in the Group income statement. The carrying amount of the hedged item is adjusted by the change in its fair value that is attributable to the hedged risk and this adjustment is recognised within trading profit in the Group income statement.

Net investment hedges

The effective part of any gain or loss on a derivative that is designated as a hedge of a net investment in a foreign operation is recognised in other comprehensive income and presented in the translation reserve in equity, and is subsequently recognised in the Group income statement as part of the profit or loss on disposal of the net investment. The ineffective portion of the gain or loss is recognised immediately within trading profit in the Group income statement.

22.2 Analysis of derivative financial instruments

20122011
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Cash flow hedges0.10.42.5
Fair value hedges2.50.1
Net investment hedges15.6
Other derivatives — not designated for hedge accounting purposes0.20.81.4
Total derivative financial instruments0.33.719.6

All of the fair values shown in the table above have been calculated using quoted prices from active markets. Cash flows in respect of the cash flow hedges shown in the table above will all occur in 2013. All of the £0.3m (2011: £19.6m) of derivative liabilities reported in the table above will mature within a year of the balance sheet date.

(a) Cash flow hedges

Cash flow hedges in the table above include: floating to fixed interest rate swaps that are used to manage the interest rate profile of the Group's borrowings (note 30.2); forward foreign currency contracts used to hedge the currency risk in forecast sales; and forward purchase contracts used to hedge the cash flow risk relating to future sales arising from fluctuation in commodity metals prices.

(b) Fair value hedges

Fair value hedges in the table above comprise forward sales contracts used to hedge the fair value risk relating to the balance sheet value of inventory arising from fluctuation in commodity metals prices.

(c) Net investment hedges

Net investment hedges in the table above, which matured during the year, comprised forward foreign exchange contracts used to provide a hedge against the foreign exchange risk associated with the Group's investments in its foreign operations. Of the change in the fair value of these contracts in the year, £16.7m (2011: £10.7m) (which was associated with the change in spot prices) was determined to be an effective hedge and was recognised in other comprehensive income and presented within translation reserves (note 27) and £3.7m (2011: £4.0m) (which was associated with the change in forward prices) was credited to the Group income statement within finance income.

(d) Derivatives not designated for hedge accounting purposes

Other derivatives in the table above that are not designated for hedge accounting purposes comprise forward foreign exchange contracts used to hedge the change in fair value of the Group's US Private Placement Loan Notes arising from fluctuation in exchange rates and forward purchase contracts used to hedge against the cash flow risk relating to future commodity metals purchases.